Is there anything more important than your health? It doesn’t matter how rich you are or how great a trader you are because if you are not healthy, you can’t truly enjoy your success. Here is a covered call trade idea that might just improve your health and the overall health of your portfolio even in this anemic economy.
GNC Holdings Inc. (NYSE:GNC) is a global retailer of health and wellness products including vitamins and herbal supplements. The company has more 7,600 locations including over 2,000 locations within Rite Aid stores. GNC has a very impressive sales track record, posting more than 25 consecutive quarters of positive same-stores sales growth.
Based on preliminary results from 2012, the company is expected to outperform its previously stated first-quarter 2012 EPS guidance. GNC has a presence in over 50 countries worldwide and sees opportunities to increase in areas where its stores are underutilized.
As you might imagine, the stock has been rising along with these same-store sales numbers, advancing from about $22 back in October of 2011 to where it is currently trading around $34. With no overhead resistance to hold GNC back, the stock may maintain a healthy uptrend for the foreseeable future.
The Trading Idea
Buy 100 shares of GNC at $34.31 and sell the April 35 call for 90 cents per contract or more. The total debit for the stock position ($3,431) will be offset by the $90 credit collected for selling the call; the total debit for the strategy is $3,341. This is also the most this trade can lose in the unlikely event that GNC falls to zero by April expiration.
The maximum profit is $159; that is a $69 advance in the stock from its current price to the 35 strike plus the $90 credit from selling the call. Breakeven is $33.41; if the shares are trading above this level at April expiration, the covered call will be profitable.
The ultimate hope when entering a covered-call trade is for the stock to just rise up to the sold call’s strike price at expiration, which in this case is $35. In this scenario, the shares advance the maximum amount without being called away and gains are collected on the stock as well as the worthless call option that was sold.
In the event GNC makes a strong move past the $35 area early in the trade and looks like it may go much higher, then the call that was previously sold (April 35) can be bought back and a higher strike can be sold against the position to avoid assignment. This practice of “rolling” the option allows the stock to remain in the portfolio and also give the position a chance to increase its return. With no overhead resistance, this could be a possible scenario.
If the stock drops in price more than was anticipated, it probably makes sense to close down the entire trade (selling the stock and buying to close the short call) to avoid further potential losses.
Stay healthy and trade smart!
As of this writing, John Kmiecik does not own any shares mentioned here.